The most likely benefit of a multinational company to its home country is
Answer (B) is correct. Benefits to the home country include (1) improved earnings and exports of products to foreign subsidiaries; (2) improved ability to obtain scarce resources; and (3) the typical benefits of free trade, i.e., greater product availability, a better international monetary system, and improved international understanding.
The most likely benefit of a multinational company to its host country is
Answer (C) is correct. Benefits to the host country include (1) new investment of capital, technology, and management abilities; (2) improvements in output and efficiency along with the resulting stronger balance of payments; and (3) stimulation of competition, increased tax revenues, and a higher standard of living.
The most likely adverse effect on a multinationalís home country is
Answer (D) is correct. Adverse effects on the home country include (1) loss of jobs and tax revenues, (2) instability caused by reduced flexibility of operation in a foreign political system, (3) the risk of expropriation, and (4) the competitive advantage of multinationals over domestic rivals.
Which of the following is not a method of financing international trade?
Answer (C) is correct. Forfaiting is a means of financing international trade, as are cross-border factoring and bankerís acceptances. ADRs are ownership rights in foreign corporations.
For an American investor who wants to avoid legal restrictions on investing in equity securities of foreign companies, the most frequent means of making indirect investments is through the purchase of
Answer (C) is correct. American depository receipts (ADRs) are ownership rights in foreign corporations.
A letter of credit is a(n)
Answer (B) is correct. A letter of credit is a definite undertaking by an issuer (such as a bank) to a beneficiary (such as a seller) at the request or for the account of an applicant (such as a buyer who is a customer of the bank) to honor a documentary presentation by payment or delivery of an item of value. The holder of a letter of credit merely needs to present the required drafts or other documents (usually documenting a sale of goods to the issuerís customer) and to receive payment from the bank or other issuer up to the limit specified.
A seller is paid in a bill of lading and letter of credit transaction when the bill of lading is given to the
Answer (D) is correct. The letter of credit and bill of lading transaction is used to assure that the seller will be paid. After the seller and buyer enter into an agreement for the sale of goods, the buyer arranges with a bank or other issuer to obtain a letter of credit. The buyerís bank arranges for a bank in the sellerís city or country (the correspondent) to issue or confirm the letter of credit to the seller. The seller draws on the letter of credit by writing drafts. The seller is paid when the bill of lading is presented to the correspondent bank.
Which method of payment in an international trade transaction requires payment whenever an instrument is presented?
Answer (C) is correct. A sight draft, also known as a demand draft, is a draft ordering payment on sight, i.e., when presented for payment. It is sent to the importerís bank with the shipping documents. After the draft is signed by the importer, the bank charges the importerís account and remits the money to the exporter.
Commercial drafts are common in international business transactions. Such a draft
Answer (C) is correct. Commercial drafts are commonly used in international business transactions. Such drafts are three-party instruments: The seller-exporter is the drawer and payee, and the buyer-importer is the drawee. A draft contains an order by the drawer to the drawee to pay a fixed amount of money to the payee.
From the sellerís perspective, what is the most risky form of payment used in international trade?
Answer (B) is correct. A sale on open-account is risky because the exporter merely ships the goods to the importer, who signs an invoice acknowledging receipt. Thus, the exporter is not assured of payment if the importer defaults. Such an arrangement is most likely if the parties have previously transacted business.